Americans are still talking about the recently deflated housing bubble, but there's a new bubble in town. It's the student loan bubble and when this one pops, it might dwarf the wreckage we've witnessed in the real-estate markets.
In the latest news, the Federal Reserve's Board of Governors warned that soaring student-loan debt has "parallels to the housing crisis," according to a May report in Bloomberg. As with housing, free-flowing cash will lead to widespread default. Of course, it's easier to repossess a tract house than to take back a potentially worthless degree.
Federal Reserve Chairman Ben Bernanke dismissed these concerns by saying that most of the money in the student-loan sector is federal money, which just means taxpayers – rather than lending institutions – will take the initial hit. But the board of governors makes a salient point as student loan debt soars to $1 trillion and exceeds the nation's level of credit-card debt.
"The bankers said student lending shares features of the housing crisis including 'significant growth of subsidized lending in pursuit of a social good,' in this case higher education instead of expanded home ownership," according to that Bloomberg report. "The lending has put upward pressure on tuition, just as the mortgage lending boom led to rising home prices, they said, calling both examples of a 'lack of underwriting discipline.'"
For my entire life, I've heard policy makers insist that there is insufficient funding for education and that getting a college degree is the pathway to a better life. But as the bankers noted, the sea of student-loan money artificially boosts the cost of tuition, which creates a new cycle of indebtedness by students. Higher tuition makes "pay-as-you-go" a less-likely option.
Lax student loans make it easier for colleges to spend money poorly. If the federal government provides a loan to virtually anyone who applies for one, then university administrations can spend foolishly. There's so much money, why not hike salaries and pensions for professors? Why not offer programs and majors that are of questionable intellectual or economic merit?
I know people with six-figure loan debt, multiple degrees and few job prospects. There were few lending standards – hey, it's only government money – so they racked up loan after loan. Others use loans to gain useful degrees with lucrative job potential, but these graduates come out of school with a crushing load of debt that will take decades to repay.
In 2012, Congress debated a controversy surrounding for-profit colleges, which receive about a quarter of the total federal Title IV student aid programs. The impetus was the latest iteration of the GI bill for active military and veterans, who often choose for-profit education programs.
"These colleges use high-pressure sales tactics to ensnare veterans, promising them a high-quality education and a 'guaranteed job,' and urging them to sign up on the spot," according to Jerome Kohlberg, in an opinion piece in the Pittsburgh Post-Gazette. "They lock themselves into long-term commitments, turn over their GI education benefits and sign up for student loans to cover the difference."
The alleged abuses at some for-profit colleges have reminded some critics of abuses by the subprime mortgage industry. But these problems are almost solely the result of easy access to government dollars. Indeed, public universities do the same thing – lure students into long-term debt commitments based on a free flow of federal dollars, even if they don't use the high-pressure tactics used by some recruiters in the private educational business. For-profit and non-profit universities rely heavily on government tuition subsidies.
Many government employees, by the way, receive automatic pay boosts when they receive additional education, so this government-funded system ratchets up government spending throughout the entire taxpayer-funded system.
When I attended college, only the rarest student stayed on campus beyond four years. Many received degrees in less than four years. Now, it's typical for students to take six years to get through a California State University program. The education establishment claims the problem is the result of too little money, but it's the opposite. There is so much money available to anyone with a pulse that there are too many students on campus and not enough classes for them.
Look at the large portion of students taking remedial courses, which reminds us that more college doesn't always equal a better education.
Given that students who get themselves in financial trouble can't unload their debt through bankruptcy, easy college tuition money can mean a lifetime of personal debt problems. These problems are the result of government officials pushing a social good – i.e., broader college attendance, or, in the real estate market, broader home ownership.
The housing bubble was inflated by government-dictated lending policies designed to expand home ownership by requiring banks to make loans to people who couldn't meet traditional down-payment and credit standards. And government policies designed to expand educational opportunities have inflated the cost of tuition, cheapened the value of education and burdened new generations with crushing debt loads.
Yet those of us who call for less government meddling and more private-sector discipline are the ones considered heartless.